What Does It Mean for an Insurance Policy to Mature?

by Fred Decker, Demand Media
    Term insurance is cheaper, but you can keep permanent insurance for the rest of your life.

    Term insurance is cheaper, but you can keep permanent insurance for the rest of your life.

    Maturity is generally a good thing, whether you're talking about wine, cheese or people. Things that are mature have grown into their potential. Some insurance policies also come to maturity over the years. It means your policy has completed its designed growth, and contains a large quantity of cash value. It's neither good or bad, but you do need to understand what it means for you and your financial plans.

    Maturing

    Most articles about life insurance tell you that there are basically two kinds. Term insurance covers you for a set number of years, and then it's gone. Permanent insurance covers you for life, which is why the traditional permanent policy is called "whole life." You also build equity in the policy over the years, rather like buying a house. In fact, you could think of it as taking out a "mortgage" on he amount of your policy's death benefit. Once your equity equals the face value, your policy is said to have "matured."

    "Whole Life" Isn't

    Although your policy might be called whole life, it might not actually protect you until your death. Most policies are set up to mature when you're either 95 or 100 years old. It's a pretty advanced age, and living that long is a great achievement even in the world of modern high-tech medicine. Still, the difference between your own hypothetical lifespan and the maturity date of your policy can create an issue for you. When it happens, your insurance company will pay you the face amount of your policy, without waiting for you to die.

    Good News, Bad News

    That sounds like an excuse to throw one heck of a 95th birthday party, and you'll probably experience worse things in your life than having someone give you a bunch of money. Still, there are a couple of potential down sides to maturation. For one thing, it puts you into a pretty high tax bracket for that year. You might also come out with less money than you think, if you've taken loans or withdrawals from the policy. It's also an issue for your heirs: The death benefit would have been paid tax-free, but the maturity cash value becomes a taxable part of your estate.

    Strategies

    You won't be the first person to face this dilemma, so there are options to choose from. For one thing, many modern policies have what's called an extension-of-maturity rider. That means you can opt to keep the insurance in force until your death, even if you outlive the maturity date. The policy's death benefit will be paid to your beneficiaries, just as you'd originally specified. Another option is to roll the insurance proceeds into an annuity, through a so-called "1035" exchange. You'll receive an income from the annuity, and you can still name beneficiaries to receive the money after you die.

    About the Author

    Fred Decker is a trained chef and certified food-safety trainer who has written and blogged on food-related topics since 2007. Previously he sold computers, insurance and mutual funds. He is a former columnist for the Saint John, New Brunswick "Telegraph-Journal," and has been published in Canada's "Hospitality and Foodservice" magazine as well as online on many high-profile websites. Decker was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.

    Photo Credits

    • Digital Vision./Digital Vision/Getty Images